Power outage hits Knight Capital, cuts off trading

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Published October 31, 2012

| Reuters

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A failed backup power generator has forced Knight Capital Group to tell clients to route all stock orders away from the brokerage on Wednesday, as the effects of Sandy, the massive storm that slammed into the U.S. East Coast, were still being felt.

It was the second time in three months the Jersey City, New Jersey-based broker has had to ask clients to route orders elsewhere.

Knight, a top U.S. market maker - a brokerage that buys and sells stocks for clients and ensures orderly trading - said the generator failed before midday, affecting its institutional equities sales and trading, and market-making businesses.

Like many other firms in the New York metro area, the company was operating on backup energy after the massive storm Sandy hit late on Monday, knocking out power for millions.

Knight's clients have been told to send their NYSE-listed and Nasdaq stocks, along with options trades, elsewhere

"All computer interfaces with Knight will be shutdown with no new orders, both by phone or electronic, being accepted at this time," the company said.

A spokeswoman for Knight said the move was to "protect clients while we determine what the issue is."

MARKETS TRADING AS USUAL

All U.S. stock markets had been shut down on Monday and Tuesday in response to pressure from firms worried about employee safety during the storm, as well as concerns about markets functioning effectively on contingency plans with light staffing in place. It was the first time in 27 years that exchanges closed because of bad weather.

On Wednesday, stock markets opened as usual.

Three months earlier, Knight was forced to route orders to other brokerages due to a software glitch that sent a deluge of unintentional trades into the market, leaving it with a massive position it had to unload at a loss of over $400 million. Knight had to take on new investors to avoid bankruptcy.

The issue on Wednesday was unrelated.

"Many people are operating from some contingency place, and often that works fine, but sometimes there are hiccups," said Larry Leibowitz, NYSE Euronext's chief operating officer. "But as a whole, it's actually going quite well. We haven't heard of widespread problems."

The New York Stock Exchange is also operating on backup generators. Leibowitz said it has multiple backups in place, and that while it was told it might have power by Friday, NYSE was ready to run on generators through the weekend and beyond.

NYSE is in communication with Knight, he said, adding that Knight has a backup to its Jersey City backup, in Purchase, New York, but switching intraday could be risky for clients.

"They are being abundantly cautious to their customers and saying, 'you should route out so that if we have to do a switch or do something, you're not impacted,' and I commend them for that."

NOT A PANIC

Volume in U.S. stocks after the two-day closure was average.

"Its not a panic," Paul Weisbruch, vice president of exchange-traded fund and options sales and trading at Street One Financial, said of the Knight issue. "Because not that many people are trading." He said the company was getting calls from clients looking to reroute orders.

Fidelity, one of the biggest U.S. brokerages, said it uses multiple market makers, such as Citadel Securities, UBS AG, Goldman Sachs, and Citigroup, so rerouting orders was not a problem.

Noah Hamman, chief executive of AdvisorShares, a Bethesda, Maryland-based exchange-traded fund provider that uses Knight as its lead market maker, was a bit troubled when he heard Knight was rerouting orders.

"It is a little disconcerting for things like backup generators to not be working because these are relatively basic disaster recovery things to have in place," he said. "I will be curious to get some feedback to find out what happened."

As a result of the Knight issue, AdvisorShares saw a few of its ETFs, such as its Global Echo ETF and its Accuvest Global Long Short ETF and start trading at wider spreads than usual for a few hours, Hamman said.

Even with the issue, Hamman said he wasn't too worried about Knight. "It's one of those days you are expecting some things not to go right," he said.

Knight's shares were down 3.4 percent at $2.53 on Wednesday afternoon.

(Reporting by John McCrank; Editing by James Dalgleish, Bernard Orr and Marguerita Choy)